The Congress returns from its Easter Recess this week to begin a work period that might see significant movement on crucial climate change legislation. With both chambers hoping to have legislation reported by the summer, the Energy and Commerce Committee is expected to begin writing a discussion draft before the end of April. There will also be some sort of finality on a reauthorized Farm Bill - either an extension of existing provisions, or a new bill ready for the President’s signature.

Senate Hearings
The Commerce Committee has noticed a hearing to examine the FY2009 NOAA budget with the expectation that NOAA administrator, Vice Adm. Conrad Lautenbacher will testify. No date has been finalized

The Energy and Natural Resources Committee will hold a hearing on April 1, at 2:30 on Forest Restoration, with officials from the US Forest Service, the Nature Conservancy, and NRDC all slated to appear

The Environment and Public Works Committee will hold a hearing on April 2, at 10am on the listing of the Polar Bear as an endangered species. Secretary of the Interior Dirk Kempthorn has been invited to testify but as of this writing has not responded.

On Thursday, the Environment and Public Works Committee will hold a hearing on “Greenhouse Gas Emissions and Higher Education” with the Presidents of Yale University, the University of Minnesota, and UC-Berkley all slated to testify.

The Foreign Relations Committee has noticed a hearing on International Deforestation, though no time has been given. Former Ambassador Stuart Eizenstat is scheduled to testify.

House of Representatives
The Select Committee on Energy Independence and Global Warming has three hearings this week. On April 1, at noon there will be a hearing on “Oil Price Issues.” On April 2, at 1:30 there will be a full committee meeting to ask for subpoenas for EPA documents related to the 2007 Supreme Court Case Massachusetts v. EPA. Following this hearing there will be another hearing on “Limiting Aviation Emissions” with Dan Elwell of the FAA, Bob Meyers of the EPA, and Tom Windmuller of the Air Transport Association testifying.

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Last week, the National Highway Traffic Safety Administration (NHTSA) issued a Notice of Intent to Prepare an Environmental Impact Statement (EIS) for the Corporate Average Fuel Economy Standards (CAFE) for model years 2011 to 2015.

The new notice “initiates the NEPA scoping process to identify the environmental issues and reasonable alternatives to be examined in the EIS, and requests comments regarding those and others matters related to the scope of NHTSA’s NEPA analysis for the new standards.”

Specifically, “[t]he scoping process initiated by this notice seeks to determine ‘the range of actions, alternatives, and impacts to be considered’ in the EIS and to identify the most important issues for analysis involving the potential environmental impacts of NHTSA’s CAFE standards.”

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Trade lawyers and environmentalists have long debated whether international trade rules under the General Agreement on Tariffs and Trade (“GATT”) and, since 1995, the World Trade Organization (“WTO”), permit imported goods to be regulated on the basis of the conditions under which they are made. The debate centers around so-called processes and production methods, or “PPMs.” While some trade law experts believe that GATT and WTO rules permit PPMs under certain circumstances, the weight of opinion seems to be on the side of those who believe they do not.

Current legislative proposals in the United States and the EU to regulate imported goods based on their “carbon footprints” are stirring up the old debate about the legality of PPMs under international trade rules. In the United States, the most prominent such proposal was introduced by Senators Lieberman and Warner as part of the America’s Climate Security Act of 2007 (“ACSA”). Under ACSA, importers of certain greenhouse gas (“GHG”)-intensive goods would be required to provide special international allowances to cover the emissions associated with the manufacture of the imported goods. EU leaders have discussed the possibility of imposing “carbon taxes” or comparable import measures, but to date no such similarly sweeping requirement has been formally proposed or introduced.

Notably, however, the EU’s recent Proposed Directive on the Promotion of the Use of Energy from Renewable Sources took a step in this direction by setting forth environmental sustainability criteria for biofuel that could create disincentives for the importation of biofuel produced under conditions that harm carbon sinks such as forests and grasslands.

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The DC Circuit Court held oral arguments yesterday in State of North Carolina v. EPA, (No. 05-1244), a case challenging the EPA’s Clean Air Interstate Rule (CAIR). The CAIR program modifies the Title IV Acid Rain Program for 28 Midwestern and eastern states, establishing a cap-and-trade program to achieve reductions in sulfur dioxide and nitrogen oxide emissions from power plants.

CAIR requires that states cut sulfur dioxide (SO₂) emissions by an amount greater than required under the acid rain program, which also uses a cap-and-trade system. A potential consequence of mandating deeper emissions cuts is that the emissions allowances could lose their value due to excess supply in the market. CAIR addresses this situation by requiring emitters to surrender allowances at an accelerated rate. For example, if a state chose to regulate only electric generating units (EGUs), the surrender ratio will initially be two Title IV credits per ton of SO₂ emissions. If a facility had a 10,000 ton Title IV allowance, the facility would then be authorized to emit only half that amount - 5,000 tons and would be required to surrender the other 5000 credit tons, thereby preserving the value of other allowances.

Petitioners representing several states and industry parties claimed that this portion of the CAIR program violated the Clean Air Act (CAA), and that EPA did not have authority to change the allocation and surrender procedures specified in Title IV. Petitioners argued that Section 404 of the CAA specifies the initial allowance allocations for individual power plants. The petitioners, led by South Carolina Electric and Gas Co., argued that because Congress was so specific in establishing the program, EPA had no authority to change the allocation and surrender program.

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Kansas Governor Kathleen Sebelius has vetoed legislation aimed at overturning her administration’s denial of an air quality permit for the $3.6 billion expansion of Sunflower Electric Power Corporation’s (”Sunflower”) Holcomb, Kansas, coal-fired power plant.

Kansas Department of Health and Environment (”DHE”) Rob Bremby denied the permit last October on grounds the new units would produce 11 million tons of carbon dioxide each year.

SB 327, which passed the Kansas Senate by a vote of 37-7 but failed to muster a veto-proof majority in the Kansas House of Representatives, would have allowed Sunflower to seek reconsideration of its permit denial while stripping DHE’s authority to deny an air quality permit if the standards imposed by the agency are stricter than those found in the federal Clean air Act.

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The U.S. Climate Action Partnership (USCAP) made an important contribution to the debate over cost containment mechanisms in a national economy-wide cap and trade program. In a six-page “discussion paper,” the coalition of industry, environmental groups and other NGOs identified the elements of a systematic approach to address price instability in a carbon cap and trade program.

The USCAP proposal focuses on measures to ensure carbon market integrity, while simultaneously providing tools to ameliorate market distortions. USCAP urges Congress to design cost containment measures to address a variety of concerns about price and cost impacts of a cap-and-trade system. The group identifies the “primary concerns” as:

1. Short-term extreme price volatility;
2. Sustained excessively high allowance prices;
3. An allowance price trajectory that discourages important investments in emissions-reducing technologies; and
4. An illiquid market.

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As Congress develops national climate change policy, members are focusing more on the details of the legislation. As a result, new terms are being used in the debates. One such term, something of a misnomer, is “safety valve.” This term is being used as short-hand for non-market mechanisms to control costs under an economy-wide cap-and-trade system.

The issue of cost containment arises in the context of hypothetical market disruptions leading to steep and rapid increases in the price of carbon credits that some believe could result in significant negative impacts on the U.S. economy.

Proponents of including a cost control mechanism contend that such price spikes could cause unanticipated declines in economic output and growth and that a cost control mechanism is necessary to buffer the most severe negative consequences. Opponents of cost control mechanisms argue that a limit on the price of emission credits would, inter alia, create market distortions for those investing in clean energy technologies or constructing clean energy infrastructure.

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In California, project sponsors and government agencies are facing increased pressure to analyze the impact of proposed projects on climate change. The California Environmental Quality Act (CEQA) requires a lead agency, before approving a project, to evaluate the potentially significant environmental impacts of that project and to adopt feasible measures to mitigate those impacts.

These requirements place project sponsors and California agencies in a difficult position because there is currently no regulatory guidance on how to evaluate an individual project’s contribution to climate change, much less how to determine whether a project’s potential contribution to climate change is “significant.” To address this difficulty, the Governor’s Office of Planning and Research (OPR) has been instructed to develop CEQA guidelines “for the mitigation of greenhouse gas emissions or the effects of greenhouse gas emissions.” OPR must complete its draft guidelines by July 1, 2009.

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This post is the third installment in our ongoing coverage of Center for Biological Diversity v. National Highway Traffic Safety Administration.

Earlier this month, the Center for Biological Diversity (CBD) filed its response to National Highway Traffic Safety Administration (NHTSA’s) Petition for Rehearing en banc. NHTSA’s Petition for Rehearing focused on the 9th Circuit’s order that the agency prepare a complete Environmental Impact Statement (EIS) that accounts for the role that auto emissions play in global climate change; NHTSA argued that the circuit court lacks authority to order an EIS. CBD’s response argues that the 9th Circuit was well within its rights to order NHTSA to produce an EIS.

CBD argues that the courts have the authority to “both ‘set aside’ an unlawful finding of no significant impact and ‘compel’ an unlawfully withheld EIS.” So long as “substantial questions are raised as to whether a project” may have a significant impact on the environment, an agency must prepare an EIS. CBD argues that once this threshold is reached, the courts may compel the agency to produce the required EIS. CBD’s filing cites six cases within the 9th Circuit alone that have ordered a full or supplemental EIS, countering NHTSA’s argument that courts do not have this authority.

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Although not drafted as a direct response to global climate change, the EPA recently issued a final rule that will significantly reduce emissions of nitrogen oxide compounds (NOx) from diesel locomotives and marine diesel engines.

Nitrous oxide is a greenhouse gas that is regulated under the Kyoto Protocol, and would be included in any cap-and-trade program established by either the Lieberman-Warner bill or the Bingaman-Specter bill.  The new rule will lead to substantial reductions of particulate matter and NOx from these sources - perhaps by as much as 80 to 90 percent by 2030.

The rule covers all new diesel locomotives and large marine diesel engines (over 600 kW), as well as remanufactured engines.  The rules for remanufactured engines will go into effect first, as soon as certified remanufacture systems are available.  The rule also establishes near-term standards for newly-built engines, which will phase in beginning in 2009.  Finally, long-term emissions standards based on high-efficiency catalytic aftertreatment technology will be phased in beginning in 2014.  The standards will be fully in place in 2030.

According to EPA estimates, implementation of the rule will reduce annual NOx emissions by 800,000 tons per year.  NOx, once converted to N2O in the atmosphere, have a warming potential roughly 310 times that of carbon dioxide.  That means this rule will have the same impact as eliminating 248 million tons of carbon dioxide emissions or taking approximately 45 million cars off the road.

For further information about this topic, please contact Akin Gump.